taxation

Which is bigger Ponzi scheme?

Rick Weber Politics , , , , , , ,

A comment on my recent post made me realize that I’ve been wrong about Social Security this whole time. It isn’t quite a giant Ponzi scheme, but if we’re being flexible with our definition of Ponzi scheme it may still be the biggest.

Many people are happy to pay into Social Security thinking they’ll get a reasonable return on their “investment”. To the extent that that’s true, and that return is financed by other people paying in (rather than on actual investments) it’s a Ponzi scheme. But others don’t pay in voluntarily. To the extent that that’s true, it’s like theft but with the robber systematically dropping some of the money. Quasi-Ponzi scheme might be a better term. Social Security paid out $615B in 2008. Let’s guess $650B for 2012. If that was all happy money, it’s one big Ponzi scheme.

But the U.S. government has another project that more closely resembles a Ponzi scheme: Treasury bonds. Here people voluntarily fork over money for a return that is financed in part by later “investors” buying Treasury bonds. Of a $3.5T budget with a $1T deficit, 6% went to paying interest last year (that’s $223B). So 29% of the budget was deficit, and we might conclude that approximately $65B of interest (0.29*$223B) is “Ponzi-financed”.

So now the question is how much of Social Security is “happy money”? Anything more than 10% makes it the bigger Ponzi-scheme. But even if Social Security is heavily financed with “happy money” it is still taken at gun point while purchasers of bonds are there voluntarily. If the government were looking to save $223B and only Social Security benefits and interest payments were on the table, the more ethical choice is to default (if not repudiate). As I recall, I’m ripping off this point from Jeff Hummel.

Balanced Budget Amendment Slated to be Rejected by Tomorrow

Rick Weber Economics, Liberty , , , ,

So Tomorrow’s the big day. The U.S. government is slated to hit the debt ceiling, and with it will be faced with the prospect of actually having a balanced budget. I think the situation is nicely summed up in the opening sentence to an article from Cato: “America faces two very serious budget problems: Democrats, and Republicans.” Of course behind those problems are voters who vote for their congressman to steal and object to others’ doing the same.

This root problem is interesting and I’d like to take a minute to speculate about it. It looks like long term economic growth in the U.S. will slow down. The pace of government expansion can only continue so long before growth slows to a crawl and we hit some equilibrium. What happens then? I think there will be two changes in patterns of entrepreneurship.

The first change is a general decline in growth-oriented entrepreneurship. As the returns to private investment fall, young innovative entrepreneurs will focus on improving their (non-taxable) lifestyle rather than getting rich. Better to run a cool boutique shop and spend lots of time loafing around than work your ass off to pay taxes. Even more likely, students trained in navigating public schools and subsidized colleges will find themselves more at home in bureaucracy than industry. C students will get productive jobs and A students will shuffle papers.

The second change is an exodus of entrepreneurs. The U.S. isn’t the only game in town. The ambitious few who decide they want to make it big (and whose entrepreneurial spirit hasn’t been ground down by life in a culture that isn’t any longer interested in such ambition) will go elsewhere. And places like the Cayman Islands will get freer and flourish as they attract these entrepreneurs.

The U.S. as a country will gradually fade from prominence, the world will be less free overall, but some places will do well and will perhaps foster long run shifts.

Inequality Unexplained

Fred Foldvary Economics, Liberty , , , , , ,

There is a new economics documentary film that stars Robert Reich, former Secretary of Labor under President Clinton and now a professor at the Goldman School of Public Policy at the University of California at Berkeley. The film, Inequality for All,  directed by Jacob Kornbluth, won a U.S. Documentary Special Jury Award and has been shown nation-wide.

Unfortunately, Robert Reich has not explained why the US has had an increasing inequality of income. Neither in the film nor in his writings and interviews does he examine the cause. Without the elimination of the cause, there can be no remedy. As usual in documentaries of social problems, most of the film just describes and tells stories about the inequality.

Inequality for All is typical of welfare-state presentations in jumping to governmental responses that only treat the symptoms and effects. Reich advocates a higher minimum wage without any analysis what determines wages in a market economy.

Most basically, in a free market, ordinary workers are paid what economists call the “marginal product,” or what an extra worker contributes to output. If a worker adds $10 each hour to total output, then that is what he is paid, and that is what he is worth to the company. If the company pays him any less, say $8, that provides an opportunity for a similar company to offer $9 and get the $10 worth of output, so competition will drive the wage up to the worker’s contribution, his marginal product.

A minimum wage forces the firm to pay more than the worker’s marginal product. The firm will not hire a worker who costs more than he is worth. The reason that workers are not all dismissed is the law of diminishing returns. In a farm or factory, if there are only a few workers, each worker’s marginal product is high, because there is a lot of land and machines, and few workers. As workers are added, each extra worker contributes less extra output. Workers are hired up to the quantity for which the wage equals the marginal product.

The minimum wage acts like a tax on labor that forces the firm to reduce the number of workers employed to that level where the higher marginal product equals the required wage. In some cases, the firm will also respond by reducing benefits such as medical insurance such as by hiring part-time instead of full-time labor.

Many firms in competitive industries respond to the higher minimum wage as they would to a higher tax. They pass on some of the costs to the customers. The higher price reduces sales, production, employment, and income.

The minimum wage is lethal to the economy as it acts as an extra tax on employment on top of payroll taxes, unemployment taxes, workers insurance taxes, and the income tax on the profits of the firm. All these taxes reduce employment and reduce the take-home pay of the worker.

Henry George stated in his 1883 book Social Problems that “There is in nature no reason for poverty.” Poverty is caused not by any lack of natural resources but by human institutions that deprive workers of the ability to buy what they produce. The institution with the power to impose this intervention is government. The totality of restrictions, mandates, taxes, and subsidies reduces enterprise and takes away much of the product of labor. Then impoverished workers need the welfare state to provide the necessities of life.

The ideology of welfare statists makes them only think of governmental aid and reject the idea that governmental intervention is the source of the problem. They sneer at “free market fundamentalism.” They don’t understand the fact that taxes on labor redistribute wealth from workers to landowners as government taxes wages to pay for public goods that generate higher rent and land value. They don’t understand that the worker-tenant pays twice for the public goods of government, once by having half his wage taxed away, and a second time in the higher housing rental he pays because greater governmental services increase locational rents.

The effective remedy for poverty is to remove all punitive taxes and land-value subsidies. We can remove subsidies to the landed interests by having them pay back the rent generated by useful public goods such as roads, schools, and security. Without taxes on labor and enterprise, the cost of labor is lower to employers, while the worker’s take-home pay is higher. The replacement of wage taxes with land value taxes would reduce economic inequality while also increasing the productivity of the economy.

Of course the elimination of poverty also has to include better education, and that can be accomplished with vouchers, payments not to schools but to parents. A voucher is a ticket that a parent could use to send his children to the best schools. It provides an incentive for educators to produce better schools. It is not a panacea, because the home and neighborhood environment are also important, but it would shift the incentives towards better schooling.

It is not only unfortunate but astonishing that a leading professor of public policy who cares about the poor would not make the prosperity tax shift, replacing wage taxes with land value taxes, the core of his policy proposal. I suspect his response would be that while this is a good idea, it is politically unfeasible, while raising the minimum wage has political support. But the reason it is politically unfeasible today is precisely that leading reformers such as Robert Reich refuse to bring the effective remedy to public attention in the ultimately futile effort to advocate policies with the least current political resistance.

Much of the gains from economic growth and welfare get captured by higher rent and land value. Raising the minimum wage is futile because if all workers get a substantially higher minimum wage, their landlords will be able to raise their housing rentals by the amount of their greater ability to pay, and the landed interests will end up with the gains. Why do you think that housing costs have been escalating while wages stagnate?

Internal Revenue Service Even Handed After All

Jacques Delacroix Current Events, Politics , , , , , ,

Liberal commentators in all media and even on this blog have been eager to announce that the IRS was an equal opportunity offender between Left and Conservative groups and that, therefore, there is not much of a (new) scandal attached to the IRS.

Peggy Noonan resets the clock in her column of Wall Street Journal of 6/29/13. (All boldings below come from me.)

According to a House Ways and Means Committee source , only seven (7) cases of the 298 cases flagged by the IRS for extra scrutiny appear to represent progressive causes. Not one of the seven was subjected to harassment and abuse. Of the seven, only two were sent follow-up questionnaires after their application for tax-exempt status was received […] And all seven saw their applications approved […]

The “source” was not identified by name. Want to bet it does not exist?

[…] Russel George, the Treasury Inspector General whose audit broke open the scandal answered Rep. Sander Levin’s charge that the audit had ignored the targeting of progressives (by the IRS, bolding and comment mine) […]

The evidence showed conservative groups were singled out by the IRS, not liberal groups. While some progressive groups may have ended up on a BOLO list, the IRS did not target them. We did not find evidence that the criteria you (Rep. Levin), labeled “Progressive” were used by the IRS to select potential political cases during the 2010 to 2013 time frame we audited. One hundred per cent of the groups with “Tea Party,” “Patriot,” or “9/12″ in their names were given extra scrutiny.

Soon, very soon, the Internal Revenue Service will withdraw its apology for misdeeds it gave about two weeks ago precisely for persecuting, treating unfairly conservative-sounding groups. Right?

I wish the liberal deniers on this matter were cunning and twisted rather than something else. It’s easier to deal with conscious dishonesty than with the alternative. Many 1932 Germans were also not twisted, not consciously dishonest; they just would not see the evidence of their eyes.

The Real IRS Problem

Warren Gibson Current Events, Liberty , , , ,

It’s heartening to see distrust and resentment of the IRS building up in the wake of the targeting of tea party groups and such. But let’s not overlook the daily predations of the IRS, small and large, which add up to a mountain of costs borne by citizens – not just monetary costs but also mental anguish and occasionally violent confrontations.

Case in point: your humble servant. This morning I received a notice demanding $8,900 in back taxes. Needless to say that ruined my day even though it took me only five minutes to realize that they made a mistake and I owe them nothing. I have high hopes that this will be resolved quickly but you never know. I mentioned my plight to a friend this morning and he chuckled. He once had a $1,400 claim which he fought for ten years until finally he got to the right person at the IRS who found their mistake in five minutes. Did he get an apology? Restitution or compensation of any kind? Of course not.

The complexity of the tax code is often cited as a significant drag on the economy, in terms of time spent gathering information and preparing returns, money paid to tax preparers and tax attorneys, etc.  But there are lots of other bad effects.  No one understands the tax code in its entirety and most IRS agents understand little of it — or worse, what they often think they understand is wrong.  Nor do taxpayers understand it.  This opens the door for errors, misunderstanding, cheating and consequent confrontations, anguish, time and money wasted, and sometimes violence.

If we have to have an income tax (which I’m unwilling to concede), let’s have a simple flat tax and do away with, if not the inherent coercion of any tax, at least the enormous expense and anguish that are part and parcel of the current insane system.

See the Cat: The Heart of Economics in One Story

Fred Foldvary Economics , , , ,

A man was walking down a shopping street and came to a store window where there was a big drawing full of lines and squiggles. A sign by the drawing asked, “Can you see the picture?”

All the man could see was a chaos of lines going every which way. He stared at it and tried to make out some kind of design, but it was all a jumble. Then he saw that some of the lines formed ears, and whiskers, and a tail. Suddenly he realized that there was a cat in the picture. Once he saw the cat, it was unmistakable. When he looked away and then looked back at the drawing, the cat was quite evident now.

The man then realized that the economy is like the cat. It seems to be a jumble of workers, consumers, enterprises, taxes, regulations, imports and exports, profits and losses – a chaos of all kinds of activities. Here are fine houses and shops full of goods, but yonder is poverty and slums. It doesn’t make any sense unless we understand the basic principles of economics. Once we have this understanding, the economy becomes clear – we see the cat instead of a jumble. We then know the cause of poverty and its remedy. But since most folks don’t see the cat, social policy just treats the symptoms without applying the remedies that would eliminate the problem.

What is this economics cat? It starts with the three factors or resource inputs of production: land, labor, and capital goods. Land includes all natural resources and opportunities. Labor is all human exertion in the production of wealth. Capital goods are tools (such as machines and buildings) used to produce wealth. The owners of land get rent, workers get wages, and the owners of capital goods get a capital return.

Picture an unpopulated island where we’re going to produce one good, corn, and there are eleven grades of land. Continue reading →

The IRS Crimes: a Gift from Providence to Libertarians

Jacques Delacroix Current Events, Politics , , , , , , , , ,

Anyone who has libertarian sentiments, in the Libertarian Party or outside of it, in the Republican Party, or elsewhere; anyone who sees himself as supporting the non-existent, imaginary “Tea Party,” is familiar with the difficulty of explaining even basic libertarian principles. There are three problems:

First, most people are lazy, especially when it comes to re-examining the creeds they absorbed in childhood or youth.

Second, libertarianism is paradoxically too familiar to draw interest. It’s more or less what you learned in high school about the work of the Founding Fathers. (Digression: It’s more interesting for immigrants like me than for the US-born precisely, because we had no superficial exposure to it at the time we had acute testosterone poisoning.)

Third, libertarianism is not sexy. It does not enjoy the emotional ease of access that big words procure: “Revolution,” “Justice,” “Fairness,” “the Future.” In other words, it’s not a cartoon; it ‘s not a reality show; it’s not a vampire movie. It’s an intellectual stance for adults only. Tough call!

Sometimes, though Providence throws us a lifeline. Now is such a time. A libertarian Hollywood scriptwriter, if there were one, could hardly come up with a better script than the current controversy regarding the IRS role in singling out conservative organizations, in persecuting them, in forcing them illegally and immorally to disgorge private information about opponents to the Obama administration. Or about imagined opponents.

The IRS storm happens at the same time as other Obama administration discrediting events:

It is trying to convince America that it did not deny protection to the assassinated Americans in Benghazi, Libya, and that it did not subsequently lie about what happened;

It is imposing on all American universities restrictions on free speech unheard for centuries in the Anglo-American legal tradition. (See Greg Lukianoff in the Wall Street Journal of 5/17/13);

It is attempting to justify spying on journalists on the basis of an unknown national security risk. (It might be justified. There are tried ways to convince the nation that the spying was justified. President Obama shows no intention of using them as I write.)

As far as the IRS persecution of Obama opponents, in my mind, it’s not a question of who is getting fired or of “who is going to jail.” Punishment of the more or less guilty would be low on my agenda. There is a more fundamental problem that is being pushed aside in televised congressional testimonies and in most of the printed press (I think. I welcome corrections.)

Given that the IRS exists as a very powerful, autonomous, large government organization of ordinary but overpaid people, with a proven capacity to hurt large numbers of citizens, it was bound to happen.

That the IRS is a government organization matters a great deal because , in practice, such organizations enjoy immunity from lawsuits. They exist beyond the reach of the arm of the law. But the rule of law is what largely defines civilized societies, of course. Such organizations as the IRS thus tend to pull us back toward a lesser state of civilization. That’s true irrespective of who is president and, to an extent, independent of which party is in power. If you have a famished and crazy dog chained in the backyard, you should not reassure yourself that everything is under control because it’s your house, not that irresponsible, other guy’s house.

It’s true that the IRS crimes now being discussed were somewhat more likely to take place under a Democrat administration. First, the Fascist current runs deep in the middle of the Democratic Party river. It’s the party of Roosevelt, who classically, used war to place as much of the American production apparatus under federal government control as he could reach (even artists). Second, the Democratic Party was the Party of Birmingham’s Bull Connor, of his attack dogs and of his water hoses aimed at peaceful black demonstrators. The Democratic Party is also most closely associated with labor unions, some of which (not all) have a history of thuggery extending a century or more.

The Republican Party, on the other hand, is not sinless but it carries in its veins an instinctive mistrust of government power which serves as some protection though as minimal protection. The rank-and-file Republican is much less likely than his Democrat counterpart to assume that anything is correct just because the government is doing it. Nevertheless, frankly, is there anyone who would assert with a straight face that the currently revealed IRS misdeeds would never happen under a Republican administration?

The truth now staring us in the face is that a free society simply cannot have in its midst a monster such as the IRS (described above). It should not be allowed to arise. If its exists, it should not be allowed to grow (as with the Obama administration giving it big additional responsibilities within Obamacare). Such a government bureaucracy should be given practically no discretion, no power to pass judgment without at least close judiciary monitoring.

How about collecting taxes for freeways, some will say? Supposing it has to be the federal government’s task to build freeways (just supposing) and to perform other necessary functions, it should be done with a simple flat tax allowing no deductions. It should be a low tax of 15% of gross income or less. (I live within my means; so can the government learn to do.) Federal tax collection would look like this.

You would receive a short postcard saying:

“1. Your income last year was___.

2. Send 15% (or less ) of that amount.

Thank you.”

Tax cheaters would have to deal with the local sheriff who would be paid a flat fee for each recovery.

Unrealistic? How about our existing system, is it realistic?

The IRS and Fascism

Jacques Delacroix Current Events, Law , , , ,

If I wanted to set up a secret police in the US, would I try to create a Gestapo from scratch? Would I call it “Gestapo,” or “NKVD,” or “KGB”?

Or would I rather take an existing, comparatively efficient agency, familiar though unloved by the mass of the people, and simply extend the reach of such an agency? I mean the Internal Revenue Service, of course.

Do I believe that President Obama  ordered the IRS to discriminate against Tea Party-sounding groups and others identified as conservatives? No, I do not.

I think he is responsible for the actions of low-level underlings because he created a statist, totalitarian atmosphere. He did this a lot through his non-actions regarding his old friends, in particular, including the bomber- terrorist Bill Ayres. He is responsible for allying himself with out-and-out extremist groups in his first election. The mainstream press is light-heartedly helping him erode democracy in this country.

None of these important actors is fundamentally evil (not even Ayres today). The president is a man who looks so good in a suit that he is the suit itself in the end, an empty suit. The liberal press is silly in the manner intelligent people who are seldom contradicted become silly. Many of the ordinary Americans who voted for Mr Obama are keeping their eyes and ears tightly shut in an effort to keep believing that everything is alright because they elected a man of color. I mean even college professors, aside from journalists. Black voters have been trained to have low expectations. They tell themselves it’s good enough that the president is (more or less) African-American.  Another kind of supporters, unions, is as corrupt as ever. Take all the teachers’ unions, for example….or, rather, don’t!

I think Mr Obama is the non-Fascist leader of a genuine, grass-root American Fascist movement. The recent discoveries at the IRS are just one manifestation of creeping fascism.

The Second Amendment has rarely been more relevant.

Eye Candy

Brandon Christensen Liberty , , , , ,

Just beneath the fold. Continue reading →

University Graduation Rates are Too High

Warren Gibson Current Events , , , , , ,

A proposal has surfaced to “punish” California state universities, including San Jose State where I teach, if they either (1) continue to raise tuition rates or (2) fail to raise their graduation rates. The punishment would take the form of reduced state support.

First of all, we taxpayers (including me; I’m a net tax payer) should rejoice at such “punishment” as it would lessen the burden on us. Taxpayers aside, how might the state universities respond to such punishment? On the fiscal side, they could recruit more out-of-state and foreign students who pay full freight. The UC campuses are already cutting admissions of in-state students in favor of out-of-state full payers – will UC eventually become UNC – University of Non-Californians? Furloughs are unlikely; they were tried once and didn’t work. They can’t cut salaries; there’s a faculty union. They’ll never cut out administrators. No, all bureaucracies, when forced to cut expenses, make cuts that are most painful to the public. Therefore, in addition to recruiting more full payers, they will cut classes.

What about graduation rates? They can’t raise admission standards because that would be “unfair” to racial minorities who are disproportionately ill-prepared for college work. They already have programs to try to coax students to study, with marginal results, and the obligatory special privileges for students with “learning disabilities.” It’s not clear what more could be done along those lines. No, I contend that the most humane policy for state universities would be to cut graduation rates. Here’s why.

It is indeed unfortunate that so many students, more than half at SJSU and other state universities, fail to graduate within six years. Those students have paid a big price in terms of money spent, debt incurred in many cases, and foregone income, with almost nothing to show for it. A bachelor’s degree from a state university, unless it’s in engineering, is worth little enough; two or three years of class work is worth nothing. Those who do make it all the way to the sheepskin gain a marginal advantage; their degree signals a certain amount of persistence. Their value to an employer remains uncertain; many, I fear, couldn’t be trusted with such simple tasks as reading with understanding, writing, doing simple calculations or, perish the thought, critical thinking.

All too many students who enter SJSU are ill-prepared and/or poorly motivated. Large numbers must take remedial math or English because they learned nothing in their public high schools. Many have little or no idea why they are there – some seem to view college as a way to delay their entry into responsible adulthood.

A good number surely have aptitudes for jobs that may require some specialized training, but not a college degree. I’m thinking of welders, hospitality workers (wait – you can get a B.A. in hospitality!), tile setters, carpenters, electricians, roofers, beauticians, nannies; the list goes on and on. What a tragedy that such students fall into the sinkhole (for them) that is a university campus.

Since admissions standards aren’t likely to be raised, the only humane thing to do is to get these students out the door as fast as possible. I expect to give a lot more D’s and F’s in my class this semester than I normally do, not because I’m pursuing any agenda but because they won’t have learned the material. Those students will be hurt, short term, but it’s the right thing for them, long term, especially if it hastens their exit from a university where they don’t belong.

Cyprus, the EU and Competing Currencies

Brandon Christensen Current Events, Economics , , , , , , , , , , , , ,

There have been many critiques over the European Union from many different quarters over the decades since its inception. With the seizure of cash from customers of banks in Cyprus, the worst threat imaginable has now come to pass for Euroskeptics. Economist Frederic Sautet explains how the heist has so far gone down:

Some depositors at Cyprus’ largest bank may lose a lot of money (e.g. see article in FT). Those with deposits above €100,000 could lose 37.5 percent in tax (cash converted into bank shares), and on top of that another 22.5 percent to replenish the bank’s reserves (a “special fund”). Basically “big depositors” are “asked” to pay for (at least part of) Cyprus’ bailout (the rest will be paid by other taxpayers in the EU).

I cannot think of a faster way to completely destroy a banking system than to expropriate its depositors. This is the kind of policies one would expect from a banana republic, not from a political system that rests on the rule of law. But this is the point: the EU does not respect the principles upon which a free society is based.

An economist over at ThinkMarkets also has a good piece on the Cyprus heist. The EU has taken an incredibly good arrangement – free trade throughout Europe – and turned it into an attempt to unify Europe into a single behemoth of a state. And all under the auspices of “federalism.” This is a bad development for a number of reasons. Continue reading →

A Free Market in Medical Services

Fred Foldvary Economics, Law, Politics , , , , , , , , , , ,

There are two directions for the reform of the U.S. medical services systems. One is towards welfare statism, the control of the medical system by the federal government, and the other is towards economic freedom, providing individuals and families a free choice in medical care.

Economic theory points to a pure free market providing the most productive and equitable economy and therefore medical services. Central planners lack the knowledge to efficiently allocate resources, and politics skews the outcome towards special interests.

Here are the reforms need to have a really free market in medical services: Continue reading →

Humanitarian Wars can be Unjust too

henrymoore Liberty , , , , , , , , ,

If you hate evils committed by individuals as much as you hates evils committed by institutions, and vice versa, as I think most people who are even remotely libertarian — wait, no! remotely human! — do, does it truly follow that you must condone one in order to combat the other? Maybe it does, at least in the short term, in a place and time where relationships between all these things have been so distorted. In this case, the distortion is caused primarily by the monopolization of not only judicious force, but very nearly all force, initiative and responsive, at every level, by a single institution (with many manifestations and interlocking jurisdictions). If you haven’t guessed already, that institution is the state.

Taking my cue (I swear there was no collusion!) from Brandon and going with the flow. Jacques Delacroix of Facts Matter and Notes on Liberty has this to say:

No one doubts that the Taliban, both in Afghanistan and in Pakistan, and Islamists in general, want to implement barbaric policies and that they do implement them whenever they have a chance. (Remember, their harsh, extremist rule in parts of Iraq contributed to turning the Sunni population against them.) Among other rolling atrocities, the Taliban close, and often firebomb schools, overwhelmingly girls schools. They are overtly working on perpetuating obscurantism and the savage treatment of women that is undeniably common in much (but not all) of the Muslim world.

He then asks: Continue reading →

Unemployment: What’s To Be Done?

Warren Gibson Economics, Politics , , , , , , , , , , ,

In Part 1 I outlined natural unemployment, government-caused unemployment, and the attempts to measure these. We saw how ambiguous and subjective some of the concepts of unemployment are and how the government, specifically the Federal Reserve, is charged with managing it. Now we turn to current conditions and what can be done about them.

There have been huge advances in technology and substantial declines in trade barriers in recent years. While these developments have raised living standards they have been hard on people whose skills were rendered obsolete or uncompetitive. When changes evolve gradually, as when so many people left farming in the last century, the disruption is not so great. Changes are now coming faster and are extending to some high-paid professional jobs. Automated systems can now handle at least the routine aspects of some legal research and medical diagnosis.

Time and time again new doors have opened to workers as old doors closed. Machines replace workers, but they raise productivity and produce new employment opportunities. We can expect this pattern to continue for a long time to come. Still, it is within the realm of possibility that robots and computers could take over so much work that the demand for human workers would shrink drastically. But those very machines would mean higher productivity and thus higher living standards.

A great deal of work can be now be done remotely, providing an advantage to areas with low living costs. Substantial outsourcing of such jobs to foreign countries has occurred (though that trend may be reversing as low-cost areas of the United States become competitive and as customer dissatisfaction and problems with managing offshore workers come up). The benefits of outsourcing and other productivity enhancements are spread across all consumers, but the job losses are concentrated among small and sometimes vocal minorities. Continue reading →

Government and Governance

Fred Foldvary Law, Politics , , , , , , , , , , ,

Policy debates typically center around the role of markets versus the role of governments. But this is a misleading distinction. Human society always has governance. Private organizations such as corporations and clubs have management, rules, and financial administration similar in function to those of government. The difference is that private governance is voluntary, while state-based government is coercively imposed on the people within some jurisdiction. So a central question is not whether the market or the government can best accomplish some task, but whether the governance shall be voluntary or coercive.

The Market-Failure Doctrine

Most economists would agree that we don’t live in the best of all possible worlds. But the doctrine of market failure found in most economics textbooks fails to distinguish between consensual and coercive governance as correctives. The prevailing theory asserts that while markets might provide private goods efficiently in a competitive economy, markets fail to provide the collective goods that people want. There are two basic reasons offered as to why markets are not sufficient. Markets can easily determine the demand for private goods, but how can we tell how much each individual wants of a collective good? We could ask people how much they are willing to pay, but how do we get a truthful answer? Free riders also are a problem. Once the collective good is provided, folks can use it whether they pay or not, so why pay?

So, the market-failure story goes, markets fail to deliver collective goods. Entrepreneurs lack incentive because they can’t get their customers to pay for the service the way they can get people to pay for individually consumed private goods. Continue reading →